This is a series on the risk manager’s role in strategic planning. In this post I describe the unique and complementary functions of two risk methodologies: risk ID and assessment, and risk scenarios.

Risk Identification and Assessment Process

If you think about it, risk assessment is the opposite of defining a business plan or constructing a forecast. Instead of building one fragile model, and placing all of your hopes on it, you are subjecting that single model to critique from 1000 different perspectives. To illustrate:

Consider a multidisciplinary round-table review of draft plans. In risk facilitation, participants consider the plan or proposal through the filters of many criteria, such as risk categories, organizational values, and financial limits.

To identify risk systematically is a form of stress testing, not by inflating variables in a financial model by a given percentage, nor by running Monte Carlo simulations, but by challenging a hundred assumptions – namely, the ones that underlie each element of the plan or proposal.

Thoroughness is built into the process. You are mapping many minds, each with its rich personal expertise and unique point of view, through many “lenses”, all directed to the scrutiny of the plan. If you lead a structured discussion among the right participants, you will identify comprehensively all the critical business risks.

If you share, as appropriate, the resulting risk profile with proponents or stakeholders, and get their input on risk and mitigation, it is much easier to gain consensus on a plan for action.

Risk Scenario Analysis

Now we come to how to deal with the unpredictable and the unknown. Conventional forecasting tends to tie our fate to one picture of the future. Risk ID will lose its efficacy as time frames extend into the future and uncertainty rises dramatically. Another risk methodology is called for.

In a previous post, I talked about risk scenarios, and the value of this method to pursue robustness and resilience, similar to an all-hazards approach. Pictures of the future that are both plausible and critical serve as a litmus test of draft plans. Scenarios go beyond stress testing, because they consider structural change of the underlying relationship among future forces and influences. This enriches the planning discussion, creates possibilities, and opens up the examination of the long-term feasibility of the firm.

Enterprise Risk Management will continue to demand of risk managers support for planning objectives, including strategic risk assessment for major projects in the long term. Rigorous risk ID in a facilitated session of subject matter experts, as well as future risk scenario analysis, are two essential risk methodologies.

This is a series on the risk manager’s role in strategic planning. In parts 1/6 – 3/6, I listed risk methodologies, reviewed mission statement examples, and addressed the question “What is an environmental scan?” – all to establish context.

Here I address reasons for poor risk assessment and the importance of risk facilitation skills.

Risk Methodology

Interviews are a common method of risk ID; surveys are also popular, and economy of scale of effort, in particular, recommends them. However, these two techniques commonly encounter methodological problems that invalidate their results.

I believe one reason for the use of interviews is that senior management and executive do not see a risk identification group session as worthy of their time. Organizations beginning an Enterprise Risk Management program will administer, if not interviews, then a survey to get the so-called “top 10 risks”. What can happen is that people responding to both interview and survey questions use very different language, frames of reference, time lines and definitions of risk. The shifting assumptions are not detected when the information is collected and aggregated.

The results of such risk surveys and interviews are not very compelling, and end up on a shelf. I have posted an introductory presentation on how to do risk assessment which quotes 5 studies from 2008 – 2009 in which firms of all types lament their poor risk assessment capability. Here is a screen shot:

I wrote a piece for Canadian Underwriter coming out in September on yet more similar findings in 2010. Essentially, information collected without rigorous risk methodology is not worth the effort.

Risk identification must be done in such a wide variety of contexts. Interviews and surveys (if well designed) will continue to be useful. But in many respects, a facilitated round table of subject matter experts is preferred, and it is an important competency for risk managers.

Risk Facilitation

The benefits of a structured discussion with a measured degree of free interaction – provided you establish the context – are quite amazing. As one client remarked, “People need to hear others’ views of risk around common issues.” This is particularly helpful in contexts where you are trying to achieve consensus in complex and controversial topics. I wrote piece back in 2006 for Risk Management Magazine with a case study of the risk facilitation process.

Formal training in facilitation is good preparation, especially if the subject matter is highly controversial or emotionally charged. If you can chair a meeting and lead a group through a complex agenda, that’s a good start. The crucial difference is that you are carrying out an ordered method, and must meet its requirements.

At the beginning of this series of posts, we listed methods: business continuity and emergency planning; innovation; high quality risk ID and assessment, and risk scenarios. These activities are scarcely possible as solitary research or surveys; they require group sessions. I believe the risk practitioner can facilitate such processes, and transfer this skill to other managers to build organizational capacity.

The next post compares and contrasts two essential risk methodologies: risk ID and assessment, and future scenarios planning.

International business managers, when thinking about funding innovation, can use generally observed principles to assist creative efforts in their firms.

International business sustainability, ethics and other challenges of globalization are going to require innovative methods, and there is no reason why IB managers and risk professionals, who are specialists in opportunity, cannot facilitate the process.

First, the authors recognize the imperative in today’s environment for “innovative products and services”, and cite prior research finding that “participatory leadership” and “supportive supervision” are conducive to innovative results. They refer to a taxonomy of behaviours for innovation leadership, including “intellectual stimulation” and “organizing feedback.” Creative people show consistently a high degree of achievement motivation and indeed, a certain psychological profile.

The authors discuss the innovation process, which I summarize roughly in this diagram:

They go on to cover nuances of the innovation process: a favourable work atmosphere; environmental scan; alignment of the work with the organization’s goals; funding innovation efforts; as well as feedback and critique – applied constructively and at the right time.

An interesting point: they cite prior work (see their reference to Curral et al. 2001) establishing that “for optimal results, a creative team should consist of about five to seven individuals”. I’ve often thought six to eight persons is the ideal for a facilitated session: fewer means insufficient diversity of views; more means you change the group dynamics and cut off participation.

According to their findings, the leader of innovation should have “technical skill or expertise” in order to:

represent the creative team;

communicate with them;

assess their needs;

mentor those less experienced;

select appropriate projects;

evaluate proposed ideas;

give feedback.

I wonder whether, by “technical expertise”, they mean within the domain of the innovation work itself. I would think not – rather, it is a multi-disciplinary background, facilitation skills and, as they say, creative problem solving abilities, that allow the innovation leader to be effective.

I was a little surprised that innovation, in their discussion, seems to be oriented solely towards products and services. Other targets for innovation – and more relevant ones, arguably – should be systematically investigated, such as business models, administrative or technical processes, interactions with stakeholders, and customer experiences. I propose a model incorporating a) targets of innovation; b) innovation methods; and c) a series of levels of benefit, from mere compliance to improving industry practice and effecting wider social change.

The authors acknowledge risk and uncertainty in the innovation process, which in a sense makes it the natural domain of risk managers – not excessively risk-averse managers, but rather risk-optimizing individuals who feel the need to expand their role of risk facilitation to help create new sources of value.

Finally, the authors address “fielding” (pilot trials) and “plan execution”. I think it’s necessary to make full use of the principles of program implementation and change management to ensure that your innovation pilot – whether a new product or service combination, management practice, workflow, process or business model – has the best chances for success.